Waiver or Ratification of Alleged Misrepresentations By Subsequent Insurance Company Conduct

As most readers will know, after this couplet in which the baseball player Casey scorns to dispute the umpire's call on the second strike, Casey proceeds to swing and miss the third pitch, striking out. Thayer's poem does not contain any indication that the slugger then sought to go back and contest the ruling on the second strike.

Unlike the notorious batsman, however, insurance companies frequently bring actions to void coverage on the grounds of alleged misrepresentation or 'fraud' in the application for insurance, when they themselves have scorned to contest coverage upon first learning that they may have a basis to do so. Whatever the rules were concerning untimely protests in 1880s semipro baseball, today's insurance coverage law is clear: An insurance company waives any right to void coverage for alleged misrepresentations or omissions in the application, if, after it learns it may have grounds for such relief, it does not promptly seek the relief, but instead takes any action inconsistent with an intent to treat the policy as void.

Waiver By Subsequent Conduct

It may seem that the most obvious focus of any inquiry into allegations that a policyholder misrepresented or omitted information from the application for insurance would be on the time the application was submitted. And, certainly, there are a number of issues central to misrepresentation allegations that arise from that time period, such as whether the insurance company specifically requested the disputed information, and whether the information was 'material' to its decision to sell the coverage. See, e.g., Vella v. Equitable Life Assurance Soc'y of the U.S., 887 F.2d 388, 392 (2d Cir. 1989) (specific questions); see, e.g., Mitchell v. United Nat'l Ins. Co., 25 Cal. Rptr. 3d 627, 638 (Ct. App. 2005) (materiality). In many cases, however, it is just as important to examine the conduct of the insurance company after the sale of the policy, to determine whether its conduct after learning that it may have a basis to void the coverage amounted to a waiver of the right to do so.

While the quotation that begins this article uses the term 'fraud,' the most dramatic species of misrepresentation allegation, courts in many jurisdictions will allow an insurance company to void coverage based on a negligent, or even innocent misrepresentation or omission in the application for coverage. See, e.g., Mattox v. W. Fid. Ins. Co., 694 F. Supp. 210, 214 (N.D. Miss. 1988) ('Mattox'). An insurance company with the right to rescind coverage based on any type of misrepresentation or omission, also has the option to elect not to exercise the right, and instead treat the insurance policy as in being in effect.

Under general principles of contract law, a misrepresentation in the formation of a contract renders the contract 'voidable' at the option of the other party, and not 'void' (as would be the case, for example, with a contract to do an illegal act). The Restatement (Second) of Contracts spells out the legal consequences of a contract being 'voidable':

A voidable contract is one where one or more parties have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract, or by ratification of the contract to extinguish the power of avoidance. Restatement (Second) of Contracts '7 (emphasis added).

Courts will look to an insurance company's conduct after learning of a basis for rescission to determine whether the insurance company made an election to treat the policy as being in force. Conduct that has been held to constitute such a waiver in the context of an insurance policy includes: accepting additional premiums, paying claims, agreeing to renew coverage, and sending communications that state or imply that coverage is still in effect. See, e.g., Prudential Ins. Co. of Am. v. Saxe, 134 F.2d 16, 29 (D.C. Cir. 1943); SEC v. Credit Bancorp, Ltd., 147 F. Supp. 2d 238, 256 (S.D.N.Y. 2001) ('Credit Bancorp'); Fla. Int'l Indem. Co. v. Osgood, 503 S.E.2d 371, 374 (Ga. Ct. App. 1998) ('Osgood'); Scalia v. Equitable Life Assurance Soc'y of the U.S., 673 N.Y.S.2d 730 (App. Div. 1998); Gouldin v. Inter-Ocean Ins. Co., 102 S.E.2d 846, 848-49 (N.C. 1958 ('Gouldin'); Archstone-Smith Opera-ting Trust v. Travelers Indem. Co. of Ill., CL-2004-220831, letter op. (Va. Cir. Ct. July 8, 2005) ('Archstone-Smith'), reh'g denied, letter op. (Va. Cir. Ct. Aug. 26, 2005).

Various Theories

The rule that an insurance company waives the right to void coverage based on an alleged misrepresentation if it acts inconsistently with a desire to treat the coverage as void after learning of the alleged misrepresentation goes by many names. Those researching the law on this issue in various jurisdictions thus must take care that they are searching broadly enough to capture all of its guises.

Many courts refer to this concept by the term 'waiver.' See, e.g., Archstone-Smith, letter op. at 6-8. Sometimes the term 'ratification' is used: 'A finding of ratification will defeat even a valid claim of misrepresentation where the party seeking to avoid the contract does not take prompt action after discovery of the alleged false statement.' Credit Bancorp, 147 F. Supp. 2d at 256.

British law recognizes this concept under the name 'affirmation,' with the insurance company being held to have affirmed a contract if, with knowledge of facts giving it the right to void coverage, it acts in a way inconsistent with a desire to treat the coverage as void. See, e.g., P.T. O'Neill & J.W. Woloniecki, The Law of Reinsurance in England and Bermuda 6-43 (1998). Other authorities address the issue as one of 'election' or 'election of remedies,' as between treating the policy as in effect (and gaining the benefits thereby) or voiding it. See, e.g., Restatement (Second) of Contracts '7.

One commentator has stated that the rule should be treated as one of public policy, and not waiver, at least in those jurisdictions that prohibit voiding the policy when the insurance company fails to rescind after a reasonable time, regardless of whether other requirements of a formal waiver are met. See Allan D. Windt, Insurance Claims & Disputes '2:30 (4th ed. 2001). The United States Supreme Court long ago linked a similar type of waiver, arising from the binding of coverage by an insurance company aware of omissions in the application, with the duty of good faith:

To hold otherwise would be to maintain that the contract of insurance requires good faith of the assured only, and not of the insurers, and to permit insurers, knowing all the facts, to continue to receive new benefits from the contract while they decline to bear its burdens. Phoenix Mut. Life Ins. Co. v. Raddin, 120 U.S. 183, 196 (1887) ('Raddin').

Courts addressing this issue sometimes are careless in their terminology, and intermix concepts of waiver with concepts of estoppel, as demonstrated by this passage from the North Carolina Supreme Court:

In general, any act, declaration, or course of dealing by the insurer, with knowledge of the facts constituting a cause of forfeiture ' which recognizes and treats the policy as still in force and leads the person insured to regard himself as still protected thereby will amount to a waiver of the forfeiture ' and will estop the insurer from insisting on the forfeiture or setting up the same as a defense when sued for a subsequent loss. Such a waiver may be inferred from acts as well as from words. Gouldin, 102 S.E.2d at 848.

Such mixture of terminology creates a risk that the policyholder seeking to establish the validity of the policy incorrectly will be forced to prove the elements both of waiver or election (where the focus is on the insurance company's relinquishment of the right to treat the policy as void, with no requirement of detrimental reliance by the policyholder) and estoppel (where the focus is on the reasonably foreseeable detrimental reliance by the policyholder). See, e.g., Kirk A. Pasich, Laws of Waiver and Estoppel: Same Result, Different Means, L.A. Daily J., Dec. 7, 1994 at 7.

Of course, there may be situations where the insurance company's conduct has caused prejudice to or detrimental reliance by the policyholder. For example, if the policyholder foregoes the opportunity to purchase alternative insurance, which would have covered a later claim, in reliance on the insurance company's treatment of the original policy as being in effect. In such cases, estoppel or laches should provide an additional basis for a policyholder to defeat the misrepresentation allegations.

The same facts that support a finding of waiver by an insurance company's subsequent conduct may also be relevant to other elements of a rescission claim or misrepresentation defense. An insurance company seeking to void coverage based on alleged misrepresentations or omissions, for example, generally has the burden to show that the allegedly omitted or misleading information was material ' that is, that it affected its decision to sell the coverage or establish the premium. See, e.g., Mitchell, 25 Cal. Rptr. 3d at 638. By its very nature, this inquiry often involves hypothetical assertions about what the insurance company would have done if it had known of certain information, and it may be difficult to avoid the effect of 20/20 hindsight. Evidence that the insurance company actually did nothing in response to learning of the disputed information (at least until a large claim came in) could go a long way to negate the essential element of materiality in the insurance company's claim.

Waiver as a Matter of Law

While the case books are full of statements that waiver is typically a question of fact for the jury, an insurance company whose undisputed conduct has treated the policy as being in force, after obtaining knowledge of a basis for voiding it, may very well be held to have waived the right to void the coverage as a matter of law. In fact, many courts see rescission or forfeiture of coverage as an extreme remedy, and will seize on any fact tending to show waiver or estoppel, holding that: ”forfeitures are not favored, and that courts are always on the alert to take advantage of any circumstances that indicate an election to waive a forfeiture, or any agreement to do so on which a party has relied and acted.” Home Beneficial Ass'n v. Field, 173 S.E. 370, 373 (Va. 1934) (quoting Farmers' Benevolent Fire Ins. Ass'n v. Kinsey, 43 S.E. 338, 339 (Va. 1903)). Other courts speak in terms of requiring only 'slight evidence' of a carrier's waiver of a misrepresentation. See, e.g., Mattox, 694 F. Supp. at 215.

In Archstone-Smith, for example, the policyholder was granted summary judgment against the insurance company's assertion that the policy was void on the grounds of an alleged omission in the material presented with the application for pollution legal liability insurance coverage for an apartment building. Letter op. at 6-8. The policyholder identified various examples of conduct the insurance company engaged in after learning of its alleged basis to avoid coverage: 'by declaring [the building] an Insured Property, by collecting premiums, and by paying claims (over a period of at least a year).' The court noted that '[t]hese actions, which are consistent with [the building] being an Insured Property, and wholly inconsistent with it not being an Insured Property, were not accompanied by any explicit reservation by AISLIC of any rights to the contrary.' Id. at 6. The court held that this evidence was sufficient to grant the policyholder judgment as a matter of law that the insurance company had elected to treat the policy as being in effect despite the alleged omissions, or waived the right to rely on those alleged omissions as a basis for a misrepresentation defense. Id. at 8.

The policyholder was similarly successful in defeating an insurance company's misrepresentation defense as a matter of law in a dispute over coverage under a fidelity and professional malpractice policy in Credit Bancorp. The court noted that discovery had demonstrated that 'there can be no dispute that the 'basis for [a] claim of rescission' was present in the information provided to Insurers.' 147 F. Supp. 2d at 257. The court then catalogued the subsequent conduct of the insurance companies that was inconsistent with a desire to treat the policy as void: 'With that knowledge, Insurers retained the premiums, negotiated endorsements, redrafted [policyholder] marketing and business documents, and engaged in annual re-signings of the Policies.' Id. (footnotes omitted). The court thus dismissed, as a matter of law, the insurance companies' affirmative defenses relating to the alleged misrepresentation. Id. at 258.

In Osgood, the court upheld a directed verdict granted to a policyholder against his fire insurance company's misrepresentation defense. 503 S.E.2d at 374. The insurance company argued that it had no obligation to pay a fire loss, because its policyholder had misrepresented his history of fire losses. Id. at 372. The court, however, found that after learning of the misrepresentations the insurance company retained the premiums, and sent a letter to the policyholder declining to renew the policy, which implied that the policy was still in force. Id. at 374. The court held that this conduct worked a waiver of the misrepresentation defense:

With knowledge of the alleged fraud, FIIC formally informed Osgood that in accordance with the policy provisions, it 'will expire effective at and from' a certain hour and day. Another part of the notice reiterated: 'CANCELLATION OR TERMINATION WILL TAKE EFFECT AT' the specified time some weeks later.

Such language focuses on the status of the policy and assures that it is alive and well and will continue through the designated expiration date. ' FIIC's retention of the prepaid premium for four and one-half years after learning of the fraud and its failure to announce the policy was void also communicated that the policy was honored. Because these actions as a whole, all taken after learning of the fraud, are inconsistent with a defense that fraud voided the policy ab initio, the court did not err in holding FIIC waived the defense. Id. at 374 (footnotes omitted).

Thus, policyholders should be aware that, under the right set of facts, insurance company assertions of misrepresentation or omission can be defeated as a matter of law.

An Insurance Company's Continued Duty to Defend

A number of courts have held that an insurance company with a duty to defend cannot use the pendency of an unproven rescission claim or misrepresentation defense as an excuse to avoid its present duty to defend. See, e.g., Indep. Petrochem. Corp. v. Aetna Cas. & Sur. Co., 654 F. Supp. 1334, 1345-46 (D.D.C. 1986), aff'd in part and rev'd in part, 944 F.2d 940 (D.C. Cir. 1991); Fed. Ins. Co. v. Kozlowski, 792 N.Y.S.2d 397 (App. Div. 2005). But see Those Certain Underwriters at Lloyd's v. Prof'l Underwriters Agency Inc., 848 N.E.2d 597 (Ill. App. Ct. 2006) (holding no present obligation to defend while rescission claim is pending). An insurance company providing a defense under such a rule should do so under a reservation of rights specifically referring to its misrepresentation allegations, to avoid a finding that its continued defense is conduct inconsistent with a desire to treat the policy as void.

Other Grounds for Waiver

Treating the policy as in force after receiving knowledge of grounds to rescind is certainly not the only way an insurance company may waive its right to void coverage. It may also waive the right to rescind if, for example, it binds coverage despite knowing of omissions on the application, as was the holding in the seminal Raddin case quoted above. In addition, the language of some policies or applications for coverage expressly waives the right to rescind under certain circumstances. See, e.g., Michael T. Sharkey, Intentional Waiver of Unintentional Miss-tatements: Contractual Limitations to Insurance Policy Rescission, Ins. Coverage L. Bull. (Sept. 2004).

Waiver based on an insurance company's conduct after it learns of grounds to void an existing policy, however, may provide many policyholders with an important additional defense to insurance company misrepresentation allegations. In addition, this issue provides an important additional area, beyond the time of the application for the coverage that should be investigated before an insurance policy can be declared void.

Michael T. Sharkey, a member of this newsletter's Board of Editors, is a partner with the law firm of Dickstein Shapiro LLP, Washington, DC. The firm (which also has offices in New York and California) represents policyholders in insurance coverage cases nationwide. The opinions expressed in this paper are those of the author and not necessarily those of any of his clients.

'Fraud!' cried the maddened thousands, and echo answered fraud;

But one scornful look from Casey and the audience was awed.

' Ernest Lawrence Thayer, Casey at the Bat.

As most readers will know, after this couplet in which the baseball player Casey scorns to dispute the umpire's call on the second strike, Casey proceeds to swing and miss the third pitch, striking out. Thayer's poem does not contain any indication that the slugger then sought to go back and contest the ruling on the second strike.

Unlike the notorious batsman, however, insurance companies frequently bring actions to void coverage on the grounds of alleged misrepresentation or 'fraud' in the application for insurance, when they themselves have scorned to contest coverage upon first learning that they may have a basis to do so. Whatever the rules were concerning untimely protests in 1880s semipro baseball, today's insurance coverage law is clear: An insurance company waives any right to void coverage for alleged misrepresentations or omissions in the application, if, after it learns it may have grounds for such relief, it does not promptly seek the relief, but instead takes any action inconsistent with an intent to treat the policy as void.

Waiver By Subsequent Conduct

It may seem that the most obvious focus of any inquiry into allegations that a policyholder misrepresented or omitted information from the application for insurance would be on the time the application was submitted. And, certainly, there are a number of issues central to misrepresentation allegations that arise from that time period, such as whether the insurance company specifically requested the disputed information, and whether the information was 'material' to its decision to sell the coverage. See, e.g. , Vella v. Equitable Life Assurance Soc'y of the U.S. , 887 F.2d 388, 392 (2d Cir. 1989) (specific questions); see, e.g. , Mitchell v. United Nat'l Ins. Co. , 25 Cal. Rptr. 3d 627, 638 (Ct. App. 2005) (materiality). In many cases, however, it is just as important to examine the conduct of the insurance company after the sale of the policy, to determine whether its conduct after learning that it may have a basis to void the coverage amounted to a waiver of the right to do so.

While the quotation that begins this article uses the term 'fraud,' the most dramatic species of misrepresentation allegation, courts in many jurisdictions will allow an insurance company to void coverage based on a negligent, or even innocent misrepresentation or omission in the application for coverage. See, e.g. , Mattox v. W. Fid. Ins. Co. , 694 F. Supp. 210, 214 (N.D. Miss. 1988) (' Mattox '). An insurance company with the right to rescind coverage based on any type of misrepresentation or omission, also has the option to elect not to exercise the right, and instead treat the insurance policy as in being in effect.

Under general principles of contract law, a misrepresentation in the formation of a contract renders the contract 'voidable' at the option of the other party, and not 'void' (as would be the case, for example, with a contract to do an illegal act). The Restatement (Second) of Contracts spells out the legal consequences of a contract being 'voidable':

A voidable contract is one where one or more parties have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract, or by ratification of the contract to extinguish the power of avoidance. Restatement (Second) of Contracts '7 (emphasis added).

Courts will look to an insurance company's conduct after learning of a basis for rescission to determine whether the insurance company made an election to treat the policy as being in force. Conduct that has been held to constitute such a waiver in the context of an insurance policy includes: accepting additional premiums, paying claims, agreeing to renew coverage, and sending communications that state or imply that coverage is still in effect. See, e.g. , Prudential Ins. Co. of Am. v. Saxe , 134 F.2d 16, 29 (D.C. Cir. 1943); SEC v. Credit Bancorp, Ltd. , 147 F. Supp. 2d 238, 256 (S.D.N.Y. 2001) (' Credit Bancorp '); Fla. Int'l Indem. Co. v. Osgood , 503 S.E.2d 371, 374 (Ga. Ct. App. 1998) (' Osgood '); Scalia v. Equitable Life Assurance Soc'y of the U.S. , 673 N.Y.S.2d 730 (App. Div. 1998); Gouldin v. Inter-Ocean Ins. Co. , 102 S.E.2d 846, 848-49 (N.C. 1958 (' Gouldin '); Archstone-Smith Opera-ting Trust v. Travelers Indem. Co. of Ill., CL-2004-220831, letter op. (Va. Cir. Ct. July 8, 2005) ('Archstone-Smith'), reh'g denied, letter op. (Va. Cir. Ct. Aug. 26, 2005).

Various Theories

The rule that an insurance company waives the right to void coverage based on an alleged misrepresentation if it acts inconsistently with a desire to treat the coverage as void after learning of the alleged misrepresentation goes by many names. Those researching the law on this issue in various jurisdictions thus must take care that they are searching broadly enough to capture all of its guises.

Many courts refer to this concept by the term 'waiver.' See, e.g., Archstone-Smith, letter op. at 6-8. Sometimes the term 'ratification' is used: 'A finding of ratification will defeat even a valid claim of misrepresentation where the party seeking to avoid the contract does not take prompt action after discovery of the alleged false statement.' Credit Bancorp, 147 F. Supp. 2d at 256.

British law recognizes this concept under the name 'affirmation,' with the insurance company being held to have affirmed a contract if, with knowledge of facts giving it the right to void coverage, it acts in a way inconsistent with a desire to treat the coverage as void. See, e.g., P.T. O'Neill & J.W. Woloniecki, The Law of Reinsurance in England and Bermuda 6-43 (1998). Other authorities address the issue as one of 'election' or 'election of remedies,' as between treating the policy as in effect (and gaining the benefits thereby) or voiding it. See, e.g., Restatement (Second) of Contracts '7.

One commentator has stated that the rule should be treated as one of public policy, and not waiver, at least in those jurisdictions that prohibit voiding the policy when the insurance company fails to rescind after a reasonable time, regardless of whether other requirements of a formal waiver are met. See Allan D. Windt, Insurance Claims & Disputes '2:30 (4th ed. 2001). The United States Supreme Court long ago linked a similar type of waiver, arising from the binding of coverage by an insurance company aware of omissions in the application, with the duty of good faith:

To hold otherwise would be to maintain that the contract of insurance requires good faith of the assured only, and not of the insurers, and to permit insurers, knowing all the facts, to continue to receive new benefits from the contract while they decline to bear its burdens. Phoenix Mut. Life Ins. Co. v. Raddin , 120 U.S. 183, 196 (1887) (' Raddin ').

Courts addressing this issue sometimes are careless in their terminology, and intermix concepts of waiver with concepts of estoppel, as demonstrated by this passage from the North Carolina Supreme Court:

In general, any act, declaration, or course of dealing by the insurer, with knowledge of the facts constituting a cause of forfeiture ' which recognizes and treats the policy as still in force and leads the person insured to regard himself as still protected thereby will amount to a waiver of the forfeiture ' and will estop the insurer from insisting on the forfeiture or setting up the same as a defense when sued for a subsequent loss. Such a waiver may be inferred from acts as well as from words. Gouldin, 102 S.E.2d at 848.

Such mixture of terminology creates a risk that the policyholder seeking to establish the validity of the policy incorrectly will be forced to prove the elements both of waiver or election (where the focus is on the insurance company's relinquishment of the right to treat the policy as void, with no requirement of detrimental reliance by the policyholder) and estoppel (where the focus is on the reasonably foreseeable detrimental reliance by the policyholder). See, e.g., Kirk A. Pasich, Laws of Waiver and Estoppel: Same Result, Different Means, L.A. Daily J., Dec. 7, 1994 at 7.

Of course, there may be situations where the insurance company's conduct has caused prejudice to or detrimental reliance by the policyholder. For example, if the policyholder foregoes the opportunity to purchase alternative insurance, which would have covered a later claim, in reliance on the insurance company's treatment of the original policy as being in effect. In such cases, estoppel or laches should provide an additional basis for a policyholder to defeat the misrepresentation allegations.

The same facts that support a finding of waiver by an insurance company's subsequent conduct may also be relevant to other elements of a rescission claim or misrepresentation defense. An insurance company seeking to void coverage based on alleged misrepresentations or omissions, for example, generally has the burden to show that the allegedly omitted or misleading information was material ' that is, that it affected its decision to sell the coverage or establish the premium. See, e.g., Mitchell, 25 Cal. Rptr. 3d at 638. By its very nature, this inquiry often involves hypothetical assertions about what the insurance company would have done if it had known of certain information, and it may be difficult to avoid the effect of 20/20 hindsight. Evidence that the insurance company actually did nothing in response to learning of the disputed information (at least until a large claim came in) could go a long way to negate the essential element of materiality in the insurance company's claim.

Waiver as a Matter of Law

While the case books are full of statements that waiver is typically a question of fact for the jury, an insurance company whose undisputed conduct has treated the policy as being in force, after obtaining knowledge of a basis for voiding it, may very well be held to have waived the right to void the coverage as a matter of law. In fact, many courts see rescission or forfeiture of coverage as an extreme remedy, and will seize on any fact tending to show waiver or estoppel, holding that: ”forfeitures are not favored, and that courts are always on the alert to take advantage of any circumstances that indicate an election to waive a forfeiture, or any agreement to do so on which a party has relied and acted.” Home Beneficial Ass'n v. Field , 173 S.E. 370, 373 (Va. 1934) (quoting Farmers' Benevolent Fire Ins. Ass'n v. Kinsey , 43 S.E. 338, 339 (Va. 1903)). Other courts speak in terms of requiring only 'slight evidence' of a carrier's waiver of a misrepresentation. See, e.g., Mattox, 694 F. Supp. at 215.

In Archstone-Smith, for example, the policyholder was granted summary judgment against the insurance company's assertion that the policy was void on the grounds of an alleged omission in the material presented with the application for pollution legal liability insurance coverage for an apartment building. Letter op. at 6-8. The policyholder identified various examples of conduct the insurance company engaged in after learning of its alleged basis to avoid coverage: 'by declaring [the building] an Insured Property, by collecting premiums, and by paying claims (over a period of at least a year).' The court noted that '[t]hese actions, which are consistent with [the building] being an Insured Property, and wholly inconsistent with it not being an Insured Property, were not accompanied by any explicit reservation by AISLIC of any rights to the contrary.' Id. at 6. The court held that this evidence was sufficient to grant the policyholder judgment as a matter of law that the insurance company had elected to treat the policy as being in effect despite the alleged omissions, or waived the right to rely on those alleged omissions as a basis for a misrepresentation defense. Id. at 8.

The policyholder was similarly successful in defeating an insurance company's misrepresentation defense as a matter of law in a dispute over coverage under a fidelity and professional malpractice policy in Credit Bancorp. The court noted that discovery had demonstrated that 'there can be no dispute that the 'basis for [a] claim of rescission' was present in the information provided to Insurers.' 147 F. Supp. 2d at 257. The court then catalogued the subsequent conduct of the insurance companies that was inconsistent with a desire to treat the policy as void: 'With that knowledge, Insurers retained the premiums, negotiated endorsements, redrafted [policyholder] marketing and business documents, and engaged in annual re-signings of the Policies.' Id. (footnotes omitted). The court thus dismissed, as a matter of law, the insurance companies' affirmative defenses relating to the alleged misrepresentation. Id. at 258.

In Osgood, the court upheld a directed verdict granted to a policyholder against his fire insurance company's misrepresentation defense. 503 S.E.2d at 374. The insurance company argued that it had no obligation to pay a fire loss, because its policyholder had misrepresented his history of fire losses. Id. at 372. The court, however, found that after learning of the misrepresentations the insurance company retained the premiums, and sent a letter to the policyholder declining to renew the policy, which implied that the policy was still in force. Id. at 374. The court held that this conduct worked a waiver of the misrepresentation defense:

With knowledge of the alleged fraud, FIIC formally informed Osgood that in accordance with the policy provisions, it 'will expire effective at and from' a certain hour and day. Another part of the notice reiterated: 'CANCELLATION OR TERMINATION WILL TAKE EFFECT AT' the specified time some weeks later.

Such language focuses on the status of the policy and assures that it is alive and well and will continue through the designated expiration date. ' FIIC's retention of the prepaid premium for four and one-half years after learning of the fraud and its failure to announce the policy was void also communicated that the policy was honored. Because these actions as a whole, all taken after learning of the fraud, are inconsistent with a defense that fraud voided the policy ab initio, the court did not err in holding FIIC waived the defense. Id. at 374 (footnotes omitted).

Thus, policyholders should be aware that, under the right set of facts, insurance company assertions of misrepresentation or omission can be defeated as a matter of law.

An Insurance Company's Continued Duty to Defend

A number of courts have held that an insurance company with a duty to defend cannot use the pendency of an unproven rescission claim or misrepresentation defense as an excuse to avoid its present duty to defend. See, e.g. , Indep. Petrochem. Corp. v. Aetna Cas. & Sur. Co. , 654 F. Supp. 1334, 1345-46 (D.D.C. 1986), aff'd in part and rev'd in part , 944 F.2d 940 (D.C. Cir. 1991); Fed. Ins. Co. v. Kozlowski , 792 N.Y.S.2d 397 (App. Div. 2005). But see Those Certain Underwriters at Lloyd's v. Prof'l Underwriters Agency Inc. , 848 N.E.2d 597 (Ill. App. Ct. 2006) (holding no present obligation to defend while rescission claim is pending). An insurance company providing a defense under such a rule should do so under a reservation of rights specifically referring to its misrepresentation allegations, to avoid a finding that its continued defense is conduct inconsistent with a desire to treat the policy as void.

Other Grounds for Waiver

Treating the policy as in force after receiving knowledge of grounds to rescind is certainly not the only way an insurance company may waive its right to void coverage. It may also waive the right to rescind if, for example, it binds coverage despite knowing of omissions on the application, as was the holding in the seminal Raddin case quoted above. In addition, the language of some policies or applications for coverage expressly waives the right to rescind under certain circumstances. See, e.g., Michael T. Sharkey, Intentional Waiver of Unintentional Miss-tatements: Contractual Limitations to Insurance Policy Rescission, Ins. Coverage L. Bull. (Sept. 2004).

Waiver based on an insurance company's conduct after it learns of grounds to void an existing policy, however, may provide many policyholders with an important additional defense to insurance company misrepresentation allegations. In addition, this issue provides an important additional area, beyond the time of the application for the coverage that should be investigated before an insurance policy can be declared void.

Michael T. Sharkey, a member of this newsletter's Board of Editors, is a partner with the law firm of Dickstein Shapiro LLP, Washington, DC. The firm (which also has offices in New York and California) represents policyholders in insurance coverage cases nationwide. The opinions expressed in this paper are those of the author and not necessarily those of any of his clients.